We expect a revaluation of the biotech sector

• Rune Sand-Holm
  Portfolio Manager
  DNB Asset Management

Large-cap companies in the commercial phase have shown greater resilience, particularly in the US. However, we believe that the outlook will improve in the second half of the year. Compressed valuations, solid fundamentals and the early signs of an increase in M&A activity are improving sentiment. The financing environment is also showing signs of stabilisation, particularly for companies with differentiated platforms or near-term catalysts. As macroeconomic uncertainty subsides and the political direction of the new US administration becomes clearer, we expect the sector to be revalued. In this environment, we identify attractive opportunities in high-quality, cash-rich biotech stocks, as well as in innovation-driven small- and mid-cap companies with clinical or commercial inflection points. Looking ahead, a selective approach focused on such stocks could offer more stable opportunities in an otherwise volatile environment.

Which stocks have driven growth in Europe and the US?

Since the beginning of the year, the best-performing stocks have been large-cap US biotech companies, particularly cash-rich stocks such as Gilead and Amgen. Mid-cap companies in the commercialisation phase with strong product launches, such as Ascendis, have also delivered solid returns. In contrast, US biotech companies with a small- or mid-cap market capitalisation were the worst performing segment, weighed down by negative sentiment and a challenging financing environment. However, selected companies in the development phase with successful clinical results were rewarded with significant price increases. A notable example is Merus, a US-listed European biotech company that experienced significant share price growth after releasing positive data on its oncology pipeline.

UCB and Argenx could gain value in the second half of the year

Several biotech stocks have suffered setbacks this year due to regulatory delays, negative feedback from the FDA, disappointing clinical trial results, financing problems, or policy changes under the new US administration. For example, vaccine developers faced challenges following leadership changes at the Department of Health and Human Services (HHS) and the Food and Drug Administration (FDA). In Europe, companies such as UCB and Argenx have underperformed since the beginning of the year, but we believe they are well positioned to regain value in the second half of the year. Sarepta Therapeutics, which is developing gene therapy for a rare neuromuscular disease, is facing multiple challenges following the death of two patients in its program. While these incidents are rare, they have led to increased regulatory scrutiny, the withdrawal of forecasts, and a more complex way forward. Although there have been several setbacks across the industry, we also see significant opportunities. Many companies with solid fundamentals are currently trading at significant discounts. In this environment, we see attractive upside potential in a market that we believe favors true stock pickers, where differentiated scientific insights, solid execution, and near-term catalysts will drive performance. 

US healthcare policy: uncertainty, but also rays of hope

Since President Trump took office, the US Department of Health and Human Services (HHS) has undergone significant changes and reforms, including extensive staff cuts, leadership changes, and funding cuts, which the administration has described as measures to combat “fraud, waste, and abuse.” Several high-profile and controversial appointments have been made, most notably that of Robert F. Kennedy Jr. as HHS secretary. Kennedy is a well-known vaccine critic and appears to be pursuing a more restrictive approach to vaccine provision. Staff cuts and consolidations within the HHS have also raised concerns that important functions of the agency could be compromised. Of particular concern are changes at the US Food and Drug Administration (FDA), which could lead to delays in drug approvals and thus delay the market launch of new drugs. The National Institutes of Health (NIH), which is part of the HHS, has also been hit hard by the new administration. Trump has sought to significantly cut NIH funding for medical research grants. Several court cases are currently pending on the cuts, and it appears that some funds may be restored. Even if some of the funds are restored, the original cuts will have hampered the progress of several research projects, raising concerns about the long-term impact on scientific progress. In addition, the “most-favored nation clause” has also attracted a lot of attention. President Trump signed an executive order in May to introduce this new pricing model as part of the Trump administration’s attempt to lower drug prices in the US, which are significantly higher than in the rest of the world. This has caused concern in the industry as it is likely to have a negative impact on innovation in drug development. 

Trump’s “Big Beautiful Bill” is another headwind, as it currently contains a number of healthcare provisions. The proposed cuts to Medicaid would not only leave millions of Americans without health insurance, but would also hit hospitals by reducing their Medicaid payments. The extent of the cuts is still uncertain, and it appears that the Senate parliamentarian has rejected some of the proposals affecting Medicaid. In general, the uncertainty created by the many changes initiated by the administration has negatively affected sentiment in the industry. The extent of the impact of many of these changes is still unclear, as it has not yet been decided which changes will actually be implemented. Although many of the changes are negative, there are also some positive aspects of the new administration. Among other things, the new FDA director has expressed positive views on regulatory flexibility and wants to increase the use of AI in the approval process for new drugs. In addition, despite staff cuts, most of the FDA’s key functions appear to remain intact, which is positive for future drug approvals. 

Customs policy: Investors await clarity

In the past, both pharmaceuticals and medical technology (medtech) were exempt from tariff increases or sanctions. However, large pharmaceutical and medical technology companies are exposed to a potential trade war due to their global supply chains. So far, pharmaceuticals have been exempt from the tariffs introduced by Trump, but the government has announced several times that further announcements will follow soon. Although neither the scope nor the timing of possible tariffs is clear, the threat of tariffs has prompted some companies, such as Eli Lilly, to announce significant investments in production facilities in the US. Many large pharmaceutical companies have established production facilities outside the US in countries with lower corporate taxes, such as Ireland. Trump wants to use tariffs to force large pharmaceutical companies to move more of their production to the US. Tariffs on pharmaceuticals are complex and would affect both European pharmaceutical companies and US companies with production facilities outside the US. The extent of the impact depends on what is taxed and at what rate. If the tariffs only apply to active pharmaceutical ingredients (APIs), the consequences for most companies would be more manageable and easier to deal with on a global basis. If, on the other hand, the tariffs target the final price of medicines, the impact could be much more severe. The tariffs could also be based on companies’ internal transfer prices, which would be a middle ground between the other two options. The ongoing uncertainty surrounding potential tariff measures makes it difficult for companies to commit to the long-term investments required to build or expand production facilities, which often take several years. Although attention to Trump’s planned healthcare tariffs has waned since they were first announced, they will continue to weigh on the sector until investors have more clarity. 

Improved sentiment in the second half

We believe the outlook for the second half of the year is brightening. Low valuations, solid fundamentals, and early signs of a pickup in M&A activity are contributing to improved sentiment. The financing environment is also showing signs of stabilization, particularly for companies with differentiated platforms or near-term catalysts. Historically, the biotechnology sector tends to perform better in the second half of the year, supported by a series of clinical trial results, regulatory decisions, and year-end positioning. As macroeconomic uncertainty eases and the policy direction of the new US administration becomes clearer, we expect the sector to perform better. Nevertheless, we believe this is a market for stock pickers, where company-specific momentum and strategy execution will be the key performance drivers. While large-cap biotech companies, particularly those with strong cash generation, have led the performance since the beginning of the year, we do not expect this trend to continue in the second half. Instead, we see more attractive opportunities in the mid-cap segment, particularly in stocks with upcoming clinical milestones, market launches or high strategic value. In Europe, low valuations and renewed interest from US investors in differentiated platforms are supporting selected stocks with late-stage catalysts.